Okomu Oil Palm Plc H1 2019 Results: Weaker Prices Continue to Pressure Earnings.

August 9, 2019/InvestmentOne Report

§  Volatile top line:  up 2.95% q/q, down 22.36% y/y.

§  Stable gross profit margin: up 22bps q/q; 77bps y/y.

§  Mixed Opex to sales ratio: down 480bps q/q; up 1699bps y/y.

§  Uninspiring Profit Before Tax: up 22.70% q/q; down 47.30% y/y.

Recently, Okomu Oil Palm Plc published its Q2 2019 results, which were reflective of the impact of trade war and lower demand from India on global prices of Crude Palm Oil (CPO). In the same vein, we believe the significant increase in CPO inventories could have slowed prices down despite the decision by India to reduce its duty on CPO to 40% from 44% in January 2019. While the price of CPO fell by 19.55% on the average, the price of rubber rose by 8.16% on the average in Q2 2019. On the other hand, lower than expected demand from Consumer Goods producers on the back of weak consumer spending could have slowed sales growth from institutional customers.  

Similarly, stability in the FX market could have encouraged importers of CPO to increase their imports as they can easily source for FX in the parallel market, this might have reduced market share of Okomu and Presco. As such, Okomu’s turnover fell by 22.36%y/y to N4.35billion in Q2 2019 with the revenue from CPO declined by 29.62%y/y. However, revenue from rubber rose by 58.41%y/y. We highlight that part of the factors driving the fall in topline was the high base effect of H1 2018 which, although usually the peak period, was extra ordinarily higher than company’s usual performance levels.  

Margin Remains Stable Despite Lower Prices

On the other hand, the company’s results showed a relatively stable gross profit margin which rose marginally by 77bpsy/y to 80.36% in Q2 2019 on the back of better cost management by the company. We believe the newly erected wood boiler, which was expected to lower rubber processing costs by about 15% in 2019 according to the management, could have supported the slight improvement in margin.   

Spike in OPEX/Sales Exacerbates Weak Performance

Moving down to the P& L line, the combination of the jump in OPEX/Sales to 43.89% (vs 26.90% in Q2 2018), and the net finance cost of N22million from a net finance income of N15.70million in Q2 2018 drove the PBT margin down to 35.95% from 52.97% in Q2 2018. We believe the company’s implementation of its planned salary increase by 15% over three years (2018-2020) could have caused the rise in OPEX while the net finance cost was driven by lower finance income which may be due to lower interest rate in Q2 2019 against Q2 2018. Overall, the company’s PBT dropped by 47.30%y/y to N1.56billion in Q2 2019.  

Seasonality Supports Top Line Growth

On a sequential basis, turnover increased by 2.95% q/q due to seasonality as CPO outputs usually reach the peak in the second quarter of the year. In the same vein, gross profit margin inched up by 22bpsq/q to 80.36% in Q2 2019. That said, the improvement in margin, a 480bps q/q decline in OPEX/sales and a 58.80%q/q fall in net finance cost drove the PBT margin up by 576bps q/q to 35.95%. In the same vein, PBT rose by 22.70% q/q to N1.56billion in Q2 2019.   

H1 Performance Remains Weak as Lower Prices Pressure Earnings

In H1 2019, turnover was down 33.80% y/y to N8.57billion due to lower CPO prices in 2019. Similarly, gross profit margin fell by 586ps y/y to 80.25% in H1 2019 on the back of weak price levels. That said, the jump in opex/sales to 46.26% in H1 2019 from 32.27% in H1 2018 and the increase in net finance cost to N76.33million from 21.30million in H1 2018 added to the impact of the fall in gross profit margin. As a result, PBT margin fell to 33.10% in H1 2019 from 53.67% in H1 2018 and PBT declined by 59.18% y/y to N2.84billion in H1 2019.  

Summary And Outlook

Overall, the results were headlined by lower pricing and a spike in operating expenses which weighed on margins.

Going forward, we expect the company to continue to leverage on the supply deficit in the local market, which has been supported by the government’s exclusion of importers of CPO from the official foreign exchange market. However, stability in the parallel FX market may encourage importation of CPO thus reducing the current supply deficit gap in the long run. In the same vein, recent complaint by local producers of CPO over illegal importation of palm oil highlights the challenges faced from smuggling. This may be negative for both volume and prices thus affecting revenue growth in the near term.

On the international prices, we believe the decision of India (a major buyer of CPO) to cut import duties on CPO to 40% from 44% (effective January 2019) could continue to support prices as demand picks up from the country. Similarly, the growing interest in biodiesel from CPO as an alternative source of energy could be positive for CPO producers thus supporting a long run growth in demand in international market. These may support prices within the medium to long run. 

In the same vein, we expect the company’s rubber expansion plan to help to diversify its revenue base and generate foreign exchange income which may be used to hedge against the company’s FX exposure. Similarly, we opine that the newly commissioned plant, Extension 2 Estate in Q2 2018, may increase the company’s production capacity and support its top line performance in the long run. We highlight that the company has completely planted all arable areas and no further land for palm is available again. 

Similarly, we are of the view that the newly erected 5mega watts turbine at the oil mill may improve margin in the near term as it is expected to generate enough power for both Okomu and Extension 1 thus reducing higher energy cost from third party. In the same vein, the expected improvement in consumer spending in H2 2019, on the back of minimum wage increase, could improve demand for CPO particular for the production of other consumer goods.

YE: DEC (N’ Million)

Q2 2019 (N’ Million)

Q/Q

Y/Y

H1 2019 (N’ Million)

Y/Y

Sales

4,345.00

2.95%

          -22.36%

8,565.46

-33.80%

Cost of Sales

-853.53

1.83%

-25.30%

-1,691.68

-5.90%

Gross Profit

3,491.47

3.23%

-21.61%

6,873.78

-38.30%

Gross margin

80.36%

22bps

77bps

80.25%

-586bps

OPEX

-1,907.16

-7.20%

26.69%

-3,962.31

-5.09%

Opex/sales

43.89%

-480bps

1,699bps

46.26%

1,399bps

Net Finance cost

-22.27

-58.80%

-241.85%

-76.33

258.36%

PBT

1,562.04

22.70%

-47.30%

2,835.14

-59.18%

PBT margin

35.95%

579bps

-1,702bps

33.10%

-2,057bps

Tax

-40.00

-84.97%

-91.92%

-306.20

-69.43%

PAT

1,522.04

51.16%

-38.37%

2,528.94

-57.45%

PAT margin

35.03%

1,117bps

-910bps

29.52%

-1,641bps


  Sources: Company financials, Investment One Research

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